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e.Future economic conditions should not be predicted unless they have already been enacted.4.Contrast the current operating and the all-inclusive concepts of income and identify arguments used in supporting each.ANSWER:The current operating school of thought holds that the income statement should contain only normal operating items and that nonoperating items should be reported in the retained earnings statement. The all-inclusive school of thought maintains that all components of comprehensive income should be in the income statement and that the retained earnings statement should reflect only total earnings reported in the income statement and dividend distribution, in addition to beginning and ending balances.The current operating advocates have contended that the income statement is more useful in assessing management's performance and predicting future years' performance if items extraneous to current management decisions are excluded. If material, extraneous, nonoperating, infrequently occurring items are reported in the income statement, financial statement users would be seriously misled and might make incorrect decisions as a result.Accounting Theory: 8theditionPage 11 of 14
Chapter 12—THE INCOME STATEMENTAll-inclusive income advocates claim that current operating income lends itself to manipulation by management because it makes the decision on whether or not an item is extraordinary. Also, financial statement users may be misled because they may not realize that substantial gains or losses have been "hidden" in the retained earnings statement. In addition, the summation of all income displayed on the income statement for a period of years should reflect the reporting entity's net income for that period. Finally, they point out that proper classification within the income statement allows both normal recurring items and unusual, infrequently occurring items to be displayed separately with the same statement.5.What is "comprehensive income," and how does SFAS No. 120 allow it to be reported?